The UAW strike will not destroy the US auto industry, but it could wreck the historic Big Three automakers.
The United Auto Workers (UAW) struck Detroit’s historic Big Three automakers, Stellantis (STLA), Ford (F), and General Motors (GM) on 15 September 2023. This strike will disrupt the auto industry because of the UAW’s demands.
For example, the UAW wants to end tiers for workers. Under tiers, an employer gives workers hired at different times different levels of pay and benefits. For example, a person hired in 2000 could have a higher wage than somebody hired in 2010 for the same job.
What are the UAW’s demands?
Other demands include replacing 401K plans with a defined benefit pension. To explain, a defined-benefit pension pays somebody a set amount each month. This guarantees all retirees a decent income. They also want significant increases in UAW retirees’ pay.
The problem is this could require companies to make large cash payments to a pension fund. This could force automakers to spend money on pensions instead of new technology or research and development. This could make the Big Three less competitive. To explain, nonunion shops like Tesla Motors (TSLA) and foreign automakers such as Xpeng (XPEV) don’t have to put money in pension funds.
The danger is companies may not have the cash to cover those payments. Consequently, Congress will have to bail out the pension fund with taxpayers’ money through the Pension Benefit Guaranty Corporation.
Another UAW demand is enormous wage increases. The UAW’s website demands a 40% to match those of the Big Three’s CEO. They also want annual Cost-of-Living Adjustments (COLA) for autoworkers. A COLA is a yearly automatic pay increase that matches inflation. Theoretically, a COLA allows a wage to keep its buying power.
Other demands include a reestablishment of UAW retiree medical benefits, and more paid time off. News stories have mentioned a 32-hour work week, but that demand isn’t at the UAW website.
Will the UAW Bankrupt Automakers?
Hence, it is easy to see why Ford (F) CEO Jim Farley claims UAW demands could bankrupt automakers. Farley told reporters that the UAW is demanding a $300,000 annual pay for its members.
If Farley is correct, the UAW demands will cost Ford $17.1 billion a year. Ford claims to employ 57,000 UAW members.
However, Ford can afford to pay those wages. For example, Ford had $42.821 billion in cash and short-term investments on 30 June 2023. Moreover, Ford reported a quarterly operating cash flow of $5.035 billion on 30 June 2023. That quarterly operating cash flow rose from $2.947 billion on 30 June 2022.
Similarly, Ford reported a $4.264 quarterly ending cash flow on 30 June 2023 and a $22.359 billion quarterly ending cash flow on 31 March 2023. Thus, the UAW’s demand is reasonable. It will not bankrupt Ford (F).
General Motors (GM) can also afford the UAW’s salary demands. GM had $32.63 billion in cash and short-term investments on 30 June 2023. Stellantis N.V. (STLA) had $60.088 billion in cash and short-term investments on 30 June 2023. Thus, the UAW’s salary demands will not bankrupt the Big Three. However, pensions are another story. I will not go down that rabbit hole.
The Big Three’s Actual Problem
he Big Three’s Actual Problem is competition, not lack of cash. Competition is a problem because the Big Three are not actually the Big Three.
To explain, America’s second largest automaker is Toyota Motor Corp (TM). Toyota headquarters is in Aichi, Japan, not Detroit. Statista estimates Toyota had 15.17% of the US auto market in December 2022.
General Motors was number one with a 17.09% of the US auto market and Ford was number three with a 13.92% share in December 2022. Stellantis was number four with an 11.66% share of the US auto market in December 2022. However, Hyundai Kia was number five with a 10.94% share in December 2022. Hyundai’s headquarters is in Seoul.
Notably, Stellantis NV (STLA) is not an American company. Its headquarters are in Amsterdam. To explain, Stellantis a holding group that owns America’s Chrysler, Italy’s Fiat, France’s Groupe SA, Vauxhall, and Opal. Thus, only two of the Big Three are not American.
The danger is that Toyota and Hyundai’s US operations are non-union. Toyota operates 10 plants in the US. Automotive News claims Hyundai’s Montgomery, Alabama, plant can churn out 400,000 vehicles a year. Alabama is famously hostile to unions.
Moreover, Hyundai’s new Mega Plant in Bryan County, Georgia, could produce 300,000 electric vehicles (EVs) a year. The Mega Plant could open in 2025. Georgia is an anti-union “right-to-work” state.
Thus, the Big Three face non-union competitors with enormous capabilities. Furthermore, Chinese automakers have not yet entered the US market.
The Tesla (TSLA) Menace
A homegrown danger is Elon Musk’s Tesla Motors (TLSA). Tesla threatens the Big Three because it is an American company, based in Austin, Texas. Yet Tesla operates like a Japanese or Korean automaker.
For example, Tesla uses the latest production methods and builds its new factories outside the US or in right-to-work states, such as Texas. Tesla’s rate of growth is staggering. It has only been in business since 2003. Yet Tesla was the world’s eighth largest automaker in May 2023.
Impressively, Tesla (TSLA) claims to have produced 479,700 vehicles and delivered 466,160 vehicles in the second quarter of 2023. Moreover, Tesla is trying to develop a $25,000 electric vehicle, robotaxis, next generation pickup trucks, self-driving vehicles, robots, and other disruptive technologies.
Tesla is successful because Elon Musk is a brilliant financier who studied the world’s most successful automakers, Toyota and Volkswagen. Then stole their business model. Unlike the Big Three, union contracts and old factories do not hamper Tesla with obsolete technology.
Notably, the Big Three have closed 65 legacy plants in the last 20 years. This is expensive and derisive. Significantly, the right to strike over plant closures is one of the UAW’s strike demands.
Conversely, Tesla does not have to deal with plant closings. Instead, Tesla just has to build new gigafactories. Meanwhile, the Big Three have to build new factories and close old ones at the same time. This increases costs and creates new disputes.
The lack of legacy factories explains how Tesla is more competitive with less cash. For example, Tesla had $23.075 billion in cash and short-term investments on 30 June 2023. Musk can spend all his money on expansion while the Big Three cannot.
Finally, Tesla’s gigafactories, like the Toyota and Hyundai plants, will stay open and keep churning out vehicles while the strike closes the Big Three’s factories. Hence, Tesla, Toyota, and Hyundai are the actual winners from the strike.
The Electric Vehicle Menace
No matter who makes them, electric vehicles (EVs) are a mortal threat to the traditional auto industry. To explain, EVs are easier and cheaper to build and more flexible.
Electric vehicles are cheaper and easier to build because they have fewer parts. For example, a traditional international combustion vehicle engine has over 1,000 parts, Business Insider’s Alistair Barr estimates. In contrast, an electric vehicle engine has around 50 parts.
Tesla claims its vehicles are even simpler. For example, Tesla claims its drivetrain has just 17 moving parts and its electric motor has just two moving parts. In contrast, a gasoline vehicle powertrain can have 2,000 components.
Consequently, an EV maker has a smaller, cheaper, and simpler supply chain. EV makers have fewer suppliers and fewer supply chain problems to grapple with. Moreover, fewer parts requires fewer workers for installation.
For example, an EV lacks an exhaust system, a fuel system, and fuel lines. This cuts costs and requires less production. Consequently, Tesla can build more vehicles on its production lines. Tesla can build more cars with fewer factories.
Consequently, EV production is easier to automate with robots. Notably, Tesla is experimenting with humanoid robots for basic labor.
Overall, electric vehicles require 40% less labor than internal combustion engine autos, Ford CEO Jim Farley claims. A Volkswagen CEO estimates EV production requires 30% less labor than a gasoline-powered car. These estimates explain why automakers such as Ford are so keen on EVs.
Ford Imitates Tesla (TSLA)
Notably, Ford is building its first gigafactory or megaplant, BlueOval City in Stanton, Tennessee. Ford claims BlueOval City can produce 500,000 electric pickup trucks a year beginning in 2025. They call BlueOval City a “mega campus.”
Importantly, Tennessee is a right-to-work state. To explain, right-to-work laws ban labor agreements that require people to join a union to take a job. This makes it harder for the UAW to unionize Tennessee auto plants. Current plans call for Ford to build a “next generation electric truck” at BlueOval City.
If BlueOval City lives up to Ford’s claims. I think it can make money for Ford (F). Even if Ford has to pay UAW wages at BlueOval City. Remember, EVs require far less labor. Hence, Ford could save money while paying higher wages.
If the 500,000 a year production claim is true, Ford could produce all of its most popular vehicle, pickup trucks there. Ford sold 246,155 pickups in the United States in the second quarter of 2023.
This includes 212,516 F-Series pickups, Ford estimates. The F-Series is America’s best-selling vehicle. The F-Series comprises almost 36% of US pickup sales in the second quarter of 2023. F-Series sales grew by 24.7% between the first quarter and second quarter of 2023.
Ford could also produce all of its best-selling Transit vans at BlueOval City. Ford sold 32,031 Transit vans in the second quarter of 2023 up 30.1% from 2022. Moreover, Ford E-Series sales grew by 63.7% in the second quarter of 2023.
Plus, Ford EV sales grew by 11.9% between the second quarter of 2022 and second 2023. Impressively, sales of one Ford EV, the Mustang Mach-E, grew by 110% between June 2022 and June 2023. All Ford EV sales grew by 35.5% in June 2023, Ford claims.
Ford (F) is the Best Value in Electric Vehicle Stocks
Therefore, I consider Ford (F) the best value in EV stocks, despite the strike. You could buy Ford (F) shares for $12.34 on 18 September 2023. In contrast, Tesla (TSLA) shares cost $265.28 on the same day.
Moreover, Ford is a dividend stock. Ford has scheduled eight 15₵ quarterly dividends between 1 December 2023 and 30 August 2023. Overall, Ford shares offered a 60₵ forward dividend and a 4.86% dividend yield on 15 September 2023. Meanwhile, Tesla pays no dividend.
I think electric vehicles are the future of autos. Therefore, people and companies who invest in EVs could profit from that transition. The strike will not change that.
*https://uaw.org/uaw-auto-bargaining/
*https://uaw.org/uaw-auto-bargaining/
*https://www.dol.gov/general/topic/retirement/typesofplans#:~:text=A%20defined%20benefit%20plan%20promises,%24100%20per%20month%20at%20retirement.
*https://www.investopedia.com/terms/c/cola.asp#:~:text=Key%20Takeaways-,A%20cost%2Dof%2Dliving%20adjustment%20(COLA)%20is%20an,COLA%20for%202023%20is%208.7%25.
*https://www.investopedia.com/articles/company-insights/091516/most-profitable-auto-companies-2016-tm-gm.asp
*https://media.ford.com/content/fordmedia/fna/us/en/news/2023/07/06/ford-continues-its-sales-momentum-as-americas-no–1-brand–truck.html
